Ag Targets Wall Street Collusion

Credit Raters Under Fire For Ratings Of Cities And Towns

Investment Banks Might Be Next

Attorney General Richard Blumenthal said Wednesday that he is filing suit against the three major credit rating agencies and that big investment banks and bond insurers might be his next targets.

Blumenthal said he will file suit in Superior Court in Hartford against Moody's Corp., Standard & Poor's and Fitch Inc. He accused the firms of illegally giving municipalities lower credit ratings than those given to similarly performing corporations in a "dual rating system" that costs taxpayers millions of dollars in unnecessary bond insurance and high interest payments.

Blumenthal said his investigation is now looking into whether investment banks and bond insurers such as MBIA and Ambac Financial Group colluded with the rating agencies to reap the financial benefits of artificially low ratings.

Blumenthal said investment banks were able to buy "lower-rated municipal bonds that provided them with higher interest rates, knowing that municipalities were far more credit-worthy."

"They did this with knowledge from the credit rating agencies," he said, "and they really benefited." He did not say which investment banks are included in his investigation.

A municipality issues bonds to pay for capital projects, such as schools, fire stations and sewer plants. When ratings are lower, the investment banks that buy the bonds can charge higher interest rates.

To avoid high rates, municipalities buy bond insurance, an extra expense. About half of all public bonds are now issued with insurance, Blumenthal said.

Bond insurers MBIA Inc. and Ambac Financial Group, both of which have been subpoenaed by Blumenthal, declined to comment Wednesday.

Mayors from towns and cities across the state stood with Blumenthal at a press conference Wednesday to criticize the rating systems. Waterbury Mayor Michael Jarjura described the ratings as "very disturbing."

"It seemed like no matter what we seemed to do, no matter what progress and achievement, they wanted to keep our town in the penalty box," Jarjura said.

Bill Black, first selectman of Marlborough, said the town has an AA credit rating, "but frankly, we don't see why we can't be a AAA," he said.

The rating agencies use letter grades to rate companies and municipalities, with a bond rating of AAA being the highest credit rating and C being the lowest.

"By and large, the vast majority of towns and cities do not have AAA ratings, and they should," Blumenthal said. "But then, there would be no need for credit agencies. ... Insurers would be out of business, as well."

McGraw-Hill Cos., which owns Standard & Poor's, said the lawsuits are "simply a case of a state attempting to use litigation to dictate what bond rating it receives."

A spokesman for Moody's said the company will try to have the suit dismissed, as its municipal rating system "has been in place for more than 90 years and has always been fully public and transparent."

David Weinfurter, Fitch's managing director, described the suit against his company as "an unfortunate development." The company has, for several months, been reviewing its municipal finance ratings and will report its findings today, he said.

Blumenthal said he is asking for the support of attorneys general in other states, estimating that artificially low credit ratings have cost taxpayers across the country billions of dollars.